Long Term Value of Whole Life vs. Term Life Insurance
8 months ago

Long Term Value of Whole Life vs. Term Life Insurance

Purchasing life insurance is essential in giving financial security to your family once you pass away. You can choose between two different options, whether it's a whole life or a term life insurance policy. Understanding the difference between whole life insurance and term life insurance is important before you purchase a policy.

Whole Life Insurance

The premiums of whole life insurance are often much more expensive than term life insurance for a couple of reasons. First, whole life insurance provides you coverage for your entire lifetime, and it's designed to create cash value over time. However, it's important to remember that a life insurance policy should provide security instead of being an investment. You can often make a lot more money by investing in mutual funds compared to whole life insurance.

Cash Surrender Value of Life Insurance

A permanent life insurance policy earns cash value over time. The insurance company must pay a part of the cash value to the insurance policyholder if the coverage is canceled. This amount of money is also known as the "cash surrender value." Many people consider accessing these funds if your life insurance policy has grown into significant cash value or if you need the extra money. Understanding the consequences of receiving cash value life insurance is important before you make a decision.

Living Benefit Riders

A Living Benefit is another way of way of surrendering your policy if you are surviving with a serious or terminal illness.  This insurance clause is often an added feature at the time of purchasing your coverage. With these benefits, the life insurance company pays or advances a portion of the policy's death benefit to you to pay for care or treatment. The company will then pay the balance of the death benefit to your beneficiary(s) if you were to die. There are many companies that offer life insurance with living benefits. 

Taxes and Other Implications

The IRS may consider part of the money from cashing out of your life insurance policy as taxable income. You can subtract the total premium payments from the amount you received in the cash surrender to calculate your taxable income. Besides tax implications, it's important to remember that you can't change your mind once you surrender your insurance policy. Beneficiaries will not have any death benefits from the policy. It may also be challenging for you to obtain a new life insurance policy in the future due to age and health.

Alternative Options to Surrendering Your Policy

Reaching out to your insurer before you surrender your policy is essential to avoid any regrets. Instead of surrendering your policy, you also have a few alternative options. For example, your policy may allow you to pay premiums with your cash value if you are struggling to make payments. You can also withdraw a certain amount from your policy without fully cashing out, or you can exchange your policy for long-term care insurance. Exploring all of your available options is essential to ensure you make the best decision involving cash value life insurance.

Life Settlements

Selling your policy, or a life settlement is the legal sale of an existing policy (typically of seniors) for more than its cash surrender value, but less than its net death benefit. A whole life policy, or universal policy are much easier to sell then a term policy. However, a term policy can often be converted to a whole life policy prior to selling it as a life settlement.  A proper policy appraisal at the time of this transaction is advisable. There are a number of reasons that a policy owner may choose to sell his or her life insurance policy and they are typically over the age of 75 and the policy has a face amount valued at over 100,000 dollars. The policy owner may no longer need or want his or her policy, he or she may wish to purchase a different kind of life insurance policy, or premium payments may no longer be affordable.

Term Life Insurance

Term life insurance provides you with life insurance coverage for a certain amount of time. Typically, this time frame ranges between 20 to 30 years. Your beneficiaries will collect a payment from the life insurance company if you or your spouse passes away during this time. Term life insurance is usually a lot cheaper than whole life insurance because it doesn't have any cash value unless you or your spouse passes away during the course of the policy.

How Much Term Life Insurance Do You Need to Buy?

Buying a term life insurance policy that's 10-12 times your income is a good idea to give your family security if something happens to you. It's also important to buy term life insurance for each spouse, even if one stays home with the kids. You can use various online calculators to determine the best amount of term life insurance you will need for your family.

How Long is Term Life Insurance?

Typically, it's a good idea to purchase a policy that will last until your kids are going off to college. You may need term life insurance for 20 years if you have small children, or you can purchase a policy for 30 years if you don't have any children yet. Reaching out to an insurance provider is always a good idea to help you find a policy that best meets the individual needs of your family.

Closing Thoughts

Knowing the differences between whole life and term life insurance is critical before you make a purchase. Whole life offers insurance coverage for your entire life, and it will also build cash value. On the other hand, most people buy term life insurance for 20 to 30 years, and it's much more affordable because it doesn't have any cash value unless you pass away.

Contacting a life insurance provider, tax consultant or life policy policy appraisal company is always important to answer any of your questions to ensure you find the best policy for your family.

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